The American Jobs Creation Act: An overview

By Steve Shane, CPA

On Oct. 22, 2004 President Bush signed into law the American Jobs Creation Act of 2004. While this significant tax legislation principally affects business taxpayers, it also contains several provisions that impact individual taxpayers.

The following overview highlights some of the act's more notable provisions. Particular attention should be paid to the effective dates of these provisions because some are temporary in nature and "sunset" after a specified period of time.

State and local sales tax deductions

The act allows taxpayers who itemize to deduct state and local general sales taxes rather than state and local income taxes in 2004 and 2005.

Taxpayers electing to deduct sales taxes can calculate the amount of the deduction one of two ways: They can keep their receipts and report the actual amount they paid during the year, or they may use a soon-to-be published IRS table. As with deductions for state and local income taxes, the deduction for state and local general sales taxes is a preference item for alternative minimum tax purposes. After 2005, the deduction "sunsets" and will no longer be available.

Since taxpayers typically pay more in income taxes than they do in sales taxes, the deduction will probably benefit taxpayers who live in a state that does not levy an income tax more than it will taxpayers who live in a state that collects an income tax. However, taxpayers who live in a state with an income tax may nevertheless benefit from this deduction if they carefully time large purchases (e.g., a new car or building materials for a new home) in 2004 and 2005.

Vehicle donations

The act limits the charitable contribution deduction for motor vehicles, boats and airplanes to the amount the charity receives when it sells the vehicle. Charitable organizations also must provide written acknowledgement to the donor that includes the donor's name and taxpayer identification number, the vehicle identification number and the gross proceeds from the sale unless the charity intends to use or materially modify the vehicle before selling it. In such a case, the charity must provide certification of the intended use of the vehicle and the duration of the use.

Failing to provide the value or providing false information may subject the charity to penalties. This provision applies only in 2005 and beyond. The provision is intended to stop perceived abuses by taxpayers claiming inflated values for vehicles donated to charitable organizations.

SUV deductions

The act limits the §179 deduction for the cost of SUVs used for business purposes to $25,000, down from $100,000. The election to deduct the cost of other new machinery and equipment placed in service during the year remains at $100,000 and has been extended for an additional two years. This provision applies to vehicles purchased after Oct. 22, 2004.

A significant portion of the cost of a new SUV purchased in 2004 can still be expensed by adding together the $25,000 initial year deduction, bonus depreciation (50 percent of the remaining balance) and regular depreciation. Bonus depreciation may not be claimed after 2004.

Subchapter S corporations

The act expands the eligible shareholder rules by allowing a maximum of 100 shareholders (from a 75-shareholder limit previously allowed) in a subchapter S corporation. In addition, the act treats family members as one shareholder for this purpose. The act also provides that suspended losses can be transferred between former spouses if the transfer is included in the divorce settlement.

These provisions will apply beginning in 2005. The provisions are intended to make it easier for family businesses to be structured as subchapter S corporations.

Non-qualified deferred compensation plans

The act imposes restrictions on the timing and form of deferral elections, the timing of distributions and the use of certain trusts to fund these plans. Elections to defer compensation must generally be made by the end of the year preceding the year in which the compensation is earned. Distributions from such plans can be made only for specific purposes. Failing to meet these requirements may subject the deferred amount to immediate taxation and possible underpayment interest and penalties.

The effective dates vary, but these provisions apply to amounts deferred in 2005 and beyond. Nearly every type of plan could be affected by these changes and therefore should be reviewed.

Homeowner's exclusion

The act provides that if the primary residence was acquired via a tax-free exchange and sold within five years of the exchange, no gain from the sale can be excluded under the homeowner's exclusion ($250,000 per individual). This provision applies to sales occurring after Oct. 22, 2004.

The provision is intended to stop the practice of (1) converting business / investment property to residential property, (2) switching the use of the residence from rental property to the taxpayer's primary residence, and then (3) selling the residence and excluding the gain.

The 270 plus provisions within the act certainly add more complexity to the tax law. As the fifth major tax cut in four years, practitioners must integrate already existing rules to these new changes. Effective dates have to be examined individually and many hidden traps are riddled throughout the act.

A CCH tax briefing of the entire bill can be found at www.tax.cchgroup.com/tax-briefings.

Steve Shane is a CPA and a senior wealth advisor with Legg Mason. He earned a BA in economics from Washington University in St. Louis and a J.D. from the University of Baltimore's School of Law.

Contact this Author: < Steven Shane > sshane@offitkurman.com

This content has not yet been Rated.

To Rate content, please Login.